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Japanese Government Loan Issues on the London Capital Market (Interwar…
Japanese Government Loan Issues on
the London Capital Market (Interwar Period)
The transformation of the London market
Context
Pre World War I
Laissez-faire: minimal government intervention in matters of foreign debt issuance
After the war
Tight control: London market disappeared, replaced by strict control exercised by the Treasury and the Bank of England.
Regulatory Measure
1/1915: Introduction of capital controls
12/1917, embargo on the export of capital
“Moral Suasion”: Control through informal negotiations
Debates over Foreign Investment
Concerns about excessive lending
Report of the Committee on Civil Research (1925) identified two factors limiting Britain’s lending capacity:
The level of savings available after meeting domestic capital needs
The surplus in the balance of payments
Impact on Domestic Investment
Discourage domestic investment
Preference for Colonial Loans
The Colonial Stock Act brings significant advantages
Lower stamp duties (0.125 percent compared with 2 percent for foreign government securities)
Eligibility as trustee securities, which increased their attractiveness.
Consequences
1928: colonial government securities accounted for 67.4 percent of Britain’s total overseas investment, compared with only 23.1 percent for foreign government securities.
The Gold Standard and Its Impact
Belief: Return to the gold standard was essential to restoring London’s leading position.
4/1925: Churchill announced Britain’s return to the gold standard at the prewar parity, removed all formal controls on overseas lending.
The Shifting Global Financial Landscape
London face competition
2 percent stamp duty on foreign loans (1920)
New York’s Dominance
1920-1930: the value of foreign government issues in the United States consistently exceeded those in Britain
Internal competition in New York
J. P. Morgan overtook Kuhn, Loeb (the bank with historical ties to Japan during the Russo-Japanese War) to become the leading investment bank.
The weakening of Paris
Closure of the Market
During the war, the Paris market was closed to foreign governments
France imposed an official ban on foreign debt issues and sharply increased taxes on foreign securities.
Despite efforts at stabilization in the late 1920s, the Paris market was unable to regain its prewar position
Analysis of Japanese Government Loans
The 6 Percent Loan of 1924
Goal: raise funds for reconstruction after the Great Kantō Earthquake of 1923 and to convert the 4.5 percent loans of 1905.
Background
P.M Inoue and Financial Commissioner Mori Kengo immediately sought a foreign loan.
Mori and Inoue gave priority to J. P. Morgan
Challenges in London
Unfavorable market: bond prices had fallen sharply, capital was scarce, and the market was tightly controlled.
Mori initially proposed a composite loan. London banks proposed a 6 percent interest rate, which is excessively high.
Formation of the Syndicate and Terms
An issuing syndicate was formed in London, including both the “Old Group” (Westminster Bank, HSBC, etc.) and a “New Group” of leading merchant banks (Barings, N. M. Rothschilds, Schroders, Morgan Grenfell).
London and New York banks decided to operate as two separate syndicates
Outcome
The loan was oversubscribed in London, indicating that the terms were very attractive to investors
Negative reaction in Japan
The 5.5 Percent Loan of 1930
Background
Inoue: Believed that Japan’s return to the gold standard was a necessity
Tsushima Juichi, formerly Mori’s secretary and now Financial Commissioner, led the negotiations.
Market conditions were far more favorable than in 1924; the Bank Rate in London had fallen significantly.
Key Points in the Negotiations
Tsushima successfully negotiated the complete removal of collateral requirements, including the negative pledge clause.
the “currency option clause” issue, under which sterling-denominated bonds could be repaid in dollars
Outcome
The loan was issued simultaneously in London (£12.5 million) and New York ($71 million).
interest rate was 5.5 percent, with an issue price of 90.
The loan was once again oversubscribed, and received a negative reaction in Japan
Conclusion
Divergence of Interests
Britain’s manufacturing industries, increasingly lost competitiveness to Japan
On the other hand, the financial sector continued to view Japan’s financial activities as a major business opportunity
Japanese government loans, which had reached peak importance for London during the Russo-Japanese War, became far less significant in the interwar years.
Shift toward New York
Confronted with a more controlled and less open London market
Reshaped Japan’s international financial strategy for decades to come.